LAST year Christina Romer, chairman of Mr Obama’s Council of Economic Advisers, noted that one of the costs of a bubble is that “some of our brightest minds make small fortunes arranging the deals, rather than pursuing potentially more socially valuable careers in such fields as science, medicine and education.” By that measure the collapse of the bubble may have its compensations. The share of new Harvard graduates entering finance or consulting, which in 2007 reached 47%, plunged to a mere 20% last year, according to the Harvard Crimson.

Whether those graduates who chose a career other than finance are about to launch the next technological revolution matters for the whole country. Innovation drives productivity, and productivity drives real incomes. A burst of productivity growth would make the years ahead a lot less painful. With bigger pay packets workers could reduce their debt and still spend more.

Innovation and productivity, however, are notoriously difficult to predict. They depend not just on inventors and entrepreneurs serendipitously stumbling upon a game-changing product, but on how quickly and widely firms incorporate that product into their operations. Between 1996 and 2009 productivity grew by a robust 2.7% a year as technologies that had been developed in previous decades, from personal computers to fibre optics, found their way into the mainstream.

Dale Jorgenson of Harvard University says technology is advancing more slowly than in the decade before the crisis, so productivity will too, by about 1.5% a year. Martin Baily of the Brookings Institution is more optimistic. He thinks productivity could grow by an average of 2.25% in the next few years, which would yield potential growth for the economy as a whole of about 2.6%—not spectacular, but a lot better than Japan’s during its lost decade. He cites several reasons. Growth is likely to be led by business investment and exports, both of which benefit firms with higher-than-average productivity. Conversely construction, an industry with low productivity, will make a much smaller contribution to GDP than it has done recently.

The combination of shrinking employment and rising GDP in the second half of 2009 has already translated into an impressive 7.4% advance in productivity at an annual rate. In part that reflects firms’ reluctance to hire when they are uncertain if growth is here to stay; the same thing happened after the 2001 recession. But it may also mean that the wave of technology adoption that fuelled productivity growth between 1996 and 2008 may still have further to run. Certainly the rebound in sales at firms such as Intel and Cisco Systems suggests so.

A dearth of talent

A recurrent complaint by such firms is that they cannot get enough college graduates with the right skills to staff up for such growth. Yet an extensive study found that between the early 1970s and late 1990s American colleges produced more than enough graduates in science, technology, engineering and maths to meet demand. The problem was that a growing proportion of them did not pursue careers in their field of study. It is not clear why not. Some may have been lured by the siren song of Wall Street, but others may simply have concluded that it did not offer a stable career, says Hal Salzman of Rutgers University, one of the authors.

The bigger risk to innovation is not a lack of skilled workers but a lack of finance. Recoveries after a financial crisis tend to be weak because of the damage done to the financial system. Firms that depend on external funds, such as bank loans or equity sales, are particularly vulnerable. A recent IMF study of Canadian and American manufacturers estimates that a one-percentage-point increase in corporate bond rates knocks a quarter-percentage point off the productivity growth of firms dependent on outside funding.

The withdrawal of credit in the past two years has been indiscriminate, hitting speculative residential developments and creative business start-ups alike. Small businesses moan that banks will lend to them only on draconian terms, if at all (though they also say weaker sales are a bigger problem). Robert Kiener, of the Precision Machined Products Association, cites the case of one Ohio manufacturer whose bank asked for his life-insurance policy as collateral.

Venture-capital finance has also contracted sharply. In part that reflects big losses sustained by charitable and university endowment funds on hedge funds, private equity and shares. Such endowment funds are strong backers of venture capital. Joshua Lerner of Harvard University has documented that although venture capital pays for only a small portion of total research and development, such R&D as it supports produces three to four times as many patents per dollar as regular corporate R&D. He also found that in the 1970s firms trying to commercialise personal computing and network technologies were held back for years by the venture-capital drought then prevailing. Last year venture-capital funds raised just $15 billion, half the average of the preceding four years (see chart 8).

The damage done by tighter finance can be overstated. Venture investment during recessions may actually be more productive, per dollar spent, than during booms, when money is showered on many variants of the same business plan. Research sponsored by the Ewing Marion Kauffman Foundation has found that entrepreneurship is surprisingly resilient to the business cycle, in part because many entrepreneurs turn to self-employment when they are laid off. Some 45% of firms in the Fortune 500 were born in recessions. But it would be safer not to bet on such resilience.